In that moment of truth – when you realize people are lying through their teeth – I read in the business pages of the New York Times that Caterpillar Tractor located in Peoria, Illinois, increased its 1st quarter profits five-fold over those of the same period a year ago and is on track to sell a record $57 billion of its products worldwide this year.

Caterpillar employs almost 23,000 workers in Illinois – over 100,000 worldwide – and the profits are spilling in from all over the globe. And yet, this is the same Caterpillar whose CEO Douglas Oberhelman has been making headlines lately with the suggestion he might move the Caterpillar headquarters to another state because the Illinois tax climate is not welcoming to business.

The governors of Texas, South Dakota and Nebraska, and more than a dozen other states, would welcome him with open arms, he wrote Gov. Quinn last March. “I have been called, ‘cornered’ and ‘wined and dined – the heat is on.” Then, with a mix of humility, obsequiousness and insincerity worthy of Uriah Heep, he professed that Caterpillar was not threatening to leave Illinois. He was only passing the letters along because he wants to help make Illinois more “business-friendly”.

“I want to stay here. And as our business grows, I’d like to invest more here – Illinois has always been the heart of Caterpillar,” he wrote. “But as the leader of this business, I have to do what’s right for Caterpillar when making decisions about where to invest. The direction that this state is headed in is not favorable to business, and I’d like to work with you to change that.”

When the letter appeared in the Bloomington Pantagraph, Oberhelman claimed it was meant to be a private communication between him and the governor. But Rich Miller of Capitol Fax reported Oberhelman simultaneously sent copies to Congressman Aaron Schock, Senate GOP leader Christine Radogno, House Republican leader Tom Cross, House Speaker Mike Madigan, Senate President John Cullerton and Quinn’s chief of staff Jack Lavin – not the best way to keep a secret.

Higher Corporate Taxes, But Who Pays Them?

What stirred Oberhelman to action was Quinn’s decision last January to sign a bill raising state income tax rates to cover an $11 billion budget deficit. Beginning this year, the personal income tax rate in Illinois will rise from 3 to 5% and the corporate tax rate will grow from 4.8 to 7%. When the Chamber of Commerce adds in the 2.5% corporate replacement tax, it claims Illinois now has the 4th highest business taxes in the nation. (Although, when weighed by gross state product, the 7% is just over the 6.8% average for all 50 states.)

But the new corporate taxes were not the prime object of Oberhelman’s concern, in part because Caterpillar never pays anything close to that rate on its reported profits. Because state taxes are based on federal returns and Caterpillar, like most multi-national corporations, takes advantage of a variety of federal tax loopholes to shelter income, there are many years when Caterpillar doesn’t pay any Illinois corporate income taxes at all.

In 2004, the Washington-based Citizens for Tax Justice surveyed the annual reports for 275 of America’s 500 largest corporations in the years 2001, 2002 and 2003. Although all were profitable in that period, it found 82 companies paid no federal taxes in at least one of those three years and 71 skipped at least one year of state corporate income taxes.

Caterpillar, as the case in point, paid no federal taxes in 2002 and 2003, nor did it pay Illinois corporate taxes in 2002, according to the study. When it did pay, it paid an effective rate of 1.1% on profits in 2001 and .4% (less than 1%) in 2003. And it was not alone. Other Illinois firms who skipped paying state corporate income taxes one or more years include Boeing, Sears, Brunswick, Sara Lee, Tribune Company and Baxter.

The Citizens for Tax Justice study is admittedly eight years old. The organization will be releasing an updated study for the years 2008-2010 this summer, and the preliminary results indicate things have gotten even worse, according to Bob McIntyre, the CTJ’s director. But its findings are consistent with a 2007 report from the Governor’s Office of Management and Budget that found 48% of Illinois corporations with sales of $50 million or more paid no corporate income taxes here from 1997 to 2005. The net result is that the percent of state income tax paid by corporations has dropped from 20 percent in the 1970’s to 12 percent today.

A hostile environment for business? Not hardly.

Watching Out For The Little Guy

The tax increase that drew Oberhelman’s ire was the 2% hike in personal income taxes, which he said would cost Caterpillar $40 million. (Not Caterpillar itself, a company spokesman later clarified, but its employees, chief among them the top 8 executives who, ironically, made about $40 million in salaries and bonuses last year.)

In 2010, when Oberhelman was still second in command, he made only $10.4 million versus the $22 million Caterpillar awarded his predecessor CEO Jim Owens in salary, perks, stock options and bonuses. Now that Oberhelman has stepped into the CEO role, and profits are on the rise again, he presumably will earn in the same $22 million a year range (although much of it will be in stock options that might not be cashed in for years.)

If the extra 2% in state taxes were assessed only against the $3.81 million Oberhelman earned in salary and bonuses last year, he would be facing an extra $76,000 tax bill this year. Even for a CEO earning $22 million, that’s real money–– about 85 times the $900 in additional taxes a line worker at Caterpillar earning $45,000 a year will have to pay. (But they, of course, don’t get the multi-million dollar stock options he does.)

All I can say is it’s good to see a corporate executive standing up for his workers, even though he’s the chief beneficiary of his actions.

Business Development or Shakedown?

What is most galling about Oberhelman’s letter to the governor is that as much as he wants to invest in Illinois, when it comes to locating new factories, he has played a vicious game of pitting one state against another to get taxpayers to give Caterpillar the highest possible “incentives” to move in. Last year alone, Caterpillar announced it will build a new parts manufacturing plant in North Carolina, but only after receiving $44 million in incentives and tax breaks from state and local authorities. It located a new excavator production facility in Victoria, Texas – in exchange for 320 acres of land, $3 million in cash and other tax breaks; and it took $200,000 from Rapid City, South Dakota to locate a new training and design center there.

Clearly, government incentives alone don’t drive factory locations. Many companies, particularly manufacturers, are drawn to states where right-to-work laws allow them to hire factory floor workers without high cost, high maintenance union contracts. But government subsidies are increasingly part of every private corporation’s growth strategy.

The practice of threatening to uproot a company if government doesn’t come through with some juicy incentives is now commonplace in Illinois and other states. In order to keep companies from leaving, Illinois recently gave a $7 million tax credit to U.S. Cellular Corp, a $19 million tax break to Continental Tire, $65 million to Navistar and an astonishing $100 million in tax incentives to keep Motorola’s Mobility division in its Libertyville headquarters. This week, Sears, which already received one incentive package in 1989 to relocate from the Sears Tower to its current Hoffman Estates headquarters, said it too is considering leaving the state unless it gets another fat subsidy package.

Free Enterprise or Freeloading?

What’s hard to fathom is why a state has to give tax breaks to profitable, multi-national corporations in order to be “business friendly.” Is there something about paying your fair share of taxes that’s un-American? And if a company is on track to make a record profit after 75 years of operating in Illinois, shouldn’t the CEO be saying thank you instead of making veiled threats to leave?

And make no mistake, Oberhelman’s letter was a threat – no matter how deftly worded. “Politicians listen to pressure,” he told a friendly crowd of 100 executives at a Tooling and Manufacturing Association meeting Monday in Hoffman Estates. He urged them to join him in using their influence on legislators to cut taxes, increase spending on infrastructure, lower workman’s compensation liability and support free trade agreements.

Oberhelman said he is speaking out in the hope it will make Illinois businesses more competitive in the marketplace. But that’s not free enterprise. That’s freeloading.